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Here's Ben Bernanke on lessons learned from the AIG mess:

To conclude, I would note that AIG offers two clear lessons for the upcoming discussion in the Congress and elsewhere on regulatory reform. First, AIG highlights the urgent need for new resolution procedures for systemically important nonbank financial firms. If a federal agency had had such tools on September 16, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate. That outcome would have been far preferable to the situation we find ourselves in now. Second, the AIG situation highlights the need for strong, effective consolidated supervision of all systemically important financial firms. AIG built up its concentrated exposure to the subprime mortgage market largely out of the sight of its functional regulators. More-effective supervision might have identified and blocked the extraordinarily reckless risk-taking at AIG-FP. These two changes could measurably reduce the likelihood of future episodes of systemic risk like the one we faced at AIG.

There's no doubt that AIG made colossally stupid financial decisions and it sounds comforting to believe all of this could have been prevented by better oversight. But the problem regulators make is to believe that new regulators would be any less fallible than private business just because ostensibly they aren't driven by the profit motive. Fannie and Freddie are perfect examples. During the mortgage boom, they were supervised by the Securities and Exchange Commission, the Federal Housing Finance Board, the Office of Federal Housing Enterprise Oversight (OFHEO), and Congress -- and yet that didn't prevent the accounting scandals or their eventual meltdown. In part, this was because corrupt Democrats who were raking in campaign cash from the companies wanted to protect them from scrutiny, but it also was a matter of regulators simply not doing a good job. After all, the mission of OFHEO, according to its website was, "to promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation)."